𝗥𝗡𝗢𝗥 𝗮𝗻𝗱 𝗗𝗧𝗔𝗔 𝗶𝗻𝘁𝗲𝗿𝗽𝗹𝗮𝘆
Some Indian DTAAs with Germany, USA, United Kingdom, Australia, New Zealand, Sweden, etc. define a “resident” under Article 4(1) as a person who is liable to tax in that State by reason of domicile, residence, citizenship, or similar criteria, b̲u̲t̲ ̲d̲o̲e̲s̲ ̲n̲o̲t̲ ̲i̲n̲c̲l̲u̲d̲e̲ ̲a̲n̲y̲ ̲p̲e̲r̲s̲o̲n̲ ̲w̲h̲o̲ ̲i̲s̲ ̲l̲i̲a̲b̲l̲e̲ ̲t̲o̲ ̲t̲a̲x̲ ̲i̲n̲ ̲t̲h̲a̲t̲ ̲S̲t̲a̲t̲e̲ ̲i̲n̲ ̲r̲e̲s̲p̲e̲c̲t̲ ̲o̲n̲l̲y̲ ̲o̲f̲ ̲i̲n̲c̲o̲m̲e̲ ̲f̲r̲o̲m̲ ̲s̲o̲u̲r̲c̲e̲s̲ ̲i̲n̲ ̲t̲h̲a̲t̲ ̲S̲t̲a̲t̲e̲ ̲o̲r̲ ̲c̲a̲p̲i̲t̲a̲l̲ ̲s̲i̲t̲u̲a̲t̲e̲d̲ ̲t̲h̲e̲r̲e̲i̲n̲ (‘𝘦𝘹𝘤𝘭𝘶𝘴𝘪𝘰𝘯𝘢𝘳𝘺 𝘭𝘪𝘮𝘣’).
The OECD Model Commentary on Article 4 clarifies that treaty residence presupposes “𝘤𝘰𝘮𝘱𝘳𝘦𝘩𝘦𝘯𝘴𝘪𝘷𝘦 𝘭𝘪𝘢𝘣𝘪𝘭𝘪𝘵𝘺 𝘵𝘰 𝘵𝘢𝘹” and that person’s subject only to source-based or ring-fenced taxation — such as diplomats or conduit structures or even mere permanent establishments of foreign entities — may fall outside treaty residence.
By virtue of domicile or residence in India, RNORs would qualify as “residents of India” under Article 4 , however, the exclusionary limb may assume significance in the context of RNOR.
Under Indian domestic tax law, an RNOR is treated as a resident, albeit with a narrower scope of taxation than an ordinarily resident. The Delhi ITAT in 𝘈𝘥𝘪𝘵𝘺𝘢 𝘒𝘩𝘢𝘯𝘯𝘢 𝘷. 𝘐𝘛𝘖 (𝘐𝘯𝘵𝘦𝘳𝘯𝘢𝘵𝘪𝘰𝘯𝘢𝘭 𝘛𝘢𝘹𝘢𝘵𝘪𝘰𝘯) has clarified that an RNOR falls within the statutory definition of “resident” under Section 6 and is merely a sub-classification within the broader category of residents. The distinction affects the scope of taxable income — not the character of residence itself.
Hence, the exclusionary limb of Article 4(1) should not normally apply to an RNOR as this status does not result in taxation limited only to Indian-source income. An RNOR may still be taxed on global income where it arises from a business controlled in, or a profession set up in, India. The regime is therefore a transitional classification within India’s residence framework — not a preferential or ring-fenced system — and, in principle, should not by itself deny treaty residence status.
However, recently, the United States, in its Technical Explanations and observations on Article 4, has expressly stated that where a country ordinarily taxes residents on a worldwide basis but allows a particular class of individuals to be taxed only on a limited territorial basis, such individuals may not be considered subject to “comprehensive taxation.” Consequently, for US treaty purposes, they may not qualify as residents of that State.
This interpretational shift makes the RNOR analysis more nuanced — particularly where reduced withholding is sought on US-source income.
